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The payday lending industry is a very competitive industry established in the 1990’s, designed to give citizens the option to receive a quick fix regarding financial issues, in an effort to make ends meet. The main objective for those in the payday loan industry “should be to serve customers in compliance with the rules of the industry and better educate them on the services and products they offer” (Personal Communications, 2012). This industry raises the controversial topic of ethical, or unethical, and to this day is still being disputed.
Cash Connection’s strategy is “to provide financial products and services to the unbanked and financially underserved customers”(CashConnection. eu), also to set themselves apart their competition with the intention of becoming the most dominant franchise in the lending industry. The lending industry was established to provide citizens in a financial crisis with quick cash loans while adhering to the rules of the industry, and informing them of the importance of wise borrowing.
A focused differentiation strategy is defined as “concentrating on a narrow buyer segment and outcompeting rivals with a product offering that meets the specific tastes and requirements of niche members better than the product offerings of rivals”. Cash Connection is taking this approach by offering attractive features to its customers that its competitors cannot offer. The different characteristics consumers find valuable when searching for a quick cash loan, such as lower interest rates, and larger loans have an impact on the consumer’s purchase decision.
Cash Connection uses that to their advantage by focusing their strategy around those features in an effort to become the leading lending franchise in that industry.
In the excerpt given by Paul Smith there is evidence that suggests that Cash Connection’s strategy and business model is ethical. “Individuals taking high interest loans were less likely to be in poverty, less likely to be hungry and less likely to have lost their job” (Personal Communications, 2012). Given this act, high interest loans have had a positive impact on society as a whole.
Cash Connection explains the importance of wise borrowing before the customer receives the loan, in hopes of preventing the customer from getting into serious financial trouble, as a fair warning before the transaction is complete. “For companies that operate within this industry, a main objective should be to serve customers in compliance with the rules of the industry and better educate them on the services and products they offer” (Personal Communications, 2012).
Certain liabilities are associated with almost every offered product, for example tobacco companies include a warning regarding the health risks associated with the product, and also, alcohol incorporates the same concept into its products. The evidence that suggests Cash Connection’s strategy and business model lies in the “Pay Loans Scrutinized” video, regarding a woman who carelessly used the system, and built up dependence for the instant cash received (CBS, 2008).
In this video a lady reveals her financial struggles she has acquired through the use of high interest lending loans. She explains how lending loans are to blame for the debt she acquired, and states she would prefer to go without heat, water, and food than be in the financial position she is currently in. She obviously abused the privilege and got herself into a predicament. The only unethical argument that rises is the high interest rates that apply under the terms and conditions, making it difficult for those living in poverty to pay back borrowed money.
The dominant economic characteristics that affect the payday lending industry consist of the different rules and regulations imposed by the government. The biggest threat the payday lending industry faces is the possibility of it becoming illegal. “A state that has permissive usury laws can always change its laws to lower ceilings on payday loan finance charges, or to make payday lending illegal”(Caskey, 2002). Also Caskey states some payday franchises require customers to be enrolled in a job position that provides income, along with a checking account.
This can have a major impact on the payday lending industry by ruling out those customers that do not fit the necessary requirements established in order to receive a lending loan. “The five competitive forces include (1) competition from rival sellers, (2) competition from potential new entrants to the industry, (3) competition from producers of substitute products, (4) supplier bargaining power, and (5) customer bargaining power” (Rollins, 2011). Rivalry among the lending industry is very intense and competitive.
Since the 1990’s when this industry was established, competition has been fierce because of “The exiting of traditional financial institutions from the small-denomination, short-term credit market; a change largely due to its high cost structure,” and “The soaring cost of bounced checks and overdraft protection fees, late bill payment penalties, and other informal extensions of short-term credit” (Personal Communications, 2012). Competition from new entrants in the industry can impose a serious threat because barriers to entry are so low. The only ingredient necessary to enter this market is access to upfront cash.
Competition from producers of substitute products contains the ability to be a serious threat because of the different types of loans that banks offer, along with the different characteristics regarding those loans, such as financing programs. Supplier bargaining power holds moderate strength which lies in the hands of the banks. Banks choose which payday franchise to do business with based on that company’s performance. Without the assistance of banks “the supplier” there is no opportunity for success, so the supplier bargaining power holds serious strength in determining the success of Cash Connection.
Lastly, Customer bargaining power does not hold great power. The rates for each payday business are basically the same, and negotiating is not an option for consumers in this industry. The five forces model reveals that the payday lending industry is not ideal for those wanting to manage a successful business. It is very easy for competitors to enter the market, it is in danger of becoming illegal, competition is fierce, and the market already contains too many. The driving forces that currently affect the payday lending industry differ from tate to state.
In South Carolina for example, the maximum loan amount is $550, the loan cannot exceed 31 days, and A licensee shall not charge, directly or indirectly, a fee for other consideration in excess of 15% of the face amount of the check” (Morton, 2012). Also several different acts were implemented by the Federal Government to address the different issues associated with payday lending that have an effect, forcing businesses like Cash Connection to create a strategy and approach that comply with these regulations.
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